Some brokers believe speciality, alternate documentation or non-conforming mortgages do not satisfy the ‘responsible lending requirements’ outlined under the National Consumer Credit Protection Act (NCCP), believing that the higher interest rates associated with these loan types make them ‘unsuitable’ under the legislation.
This is 100 per cent not the case. Nowhere does NCCP state that a specific interest rate makes a loan unsuitable. This common misconception has caused some brokers to unnecessarily stay away from this legitimate market segment.
In fact, the NCPP doesn’t differentiate specialist loans from prime full docs. This gives brokers the ability to write both types. The only point of differentiation is the income verification process. Under NCCP, the use of a Borrower Self-Certification Income Declaration is no longer acceptable in isolation. There must always be other forms of alternative income documentation to support the loan application.
Essentially, NCCP requires brokers to make reasonable enquiries about the borrower’s needs, objectives, financial circumstances and an active effort to verify those financial circumstances when assessing suitability for any proposed loan.
In terms of determining suitability, a loan – whether prime or speciality – will be classed as suitable if it meets the borrower’s requirements, objectives and the borrower has the capacity to repay the loan without experiencing substantial hardship.
When it comes to ‘reasonable enquiries’, ASIC has asked brokers to consider the amount and source of income, length and nature of employment, fixed and variable expenses, such as rent and child support and credit history. Brokers must also consider the borrower’s age, number of dependants, assets, any existing debts to be repaid from the loan and any reasonably foreseeable changes such as impending retirement and geographical factors which may increase expenses.
In respect to a borrower’s requirements and objectives, brokers are asked to consider the amount of credit needed, the time frame required, the purpose and benefit sought, and whether the borrower seeks particular product features or flexibility and understands the costs of these features and any additional risks.
The bottom line is, so long as brokers take the time to make reasonable enquiries as to the borrower's needs, financial position and act with honesty and integrity, then there is no reason for brokers to be concerned about offering specialist or non-conforming loans. The rules under NCCP are a level playing field for both speciality and prime loan types.
The specialist market is estimated to be worth $3–5 billion per year and represents a significant and growing opportunity for brokers to extend their client base. Offering speciality lending products enables brokers to enhance the opportunity of solutions as well as expanding a broker’s appeal and ability to service their customers.
Armed with more solutions from different market segments improves a broker's ability to say ‘yes’ more often. In turn, this helps to bolster loan volumes, increases their bottom line and importantly helps them enter into long-standing relationships with new clients.
Historical evidence shows speciality borrowers will become some of a broker’s biggest advocates and will readily refer other potential clients. Like a prime loan customer their needs are no different, they just want their broker to listen to their circumstances and provide a solution.